GUNDLACH: The Fed shouldn't hike rates in December

Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital Thomson Reuters NEW YORK (Reuters) - DoubleLine Capital co-founder Jeffrey Gundlach, widely followed for his investment calls, warned on Thursday that the U.S. Federal Reserve should not raise rates in December as economic and financial conditions have become vulnerable.

Gundlach said the Goldman Sachs Financial Conditions Index shows the market has already tightened for the Fed as the index sits at its worst level since 2014 and the Great Recession.

Gundlach, speaking at the Inside Fixed Income conference, also cited trailing earnings, which are not trending in the right direction. It also appears "the dollar has started another leg up," he noted.

The biggest reason the Fed should not raise rates is the implied inflation rate in bond market pricing, he said. Implied inflation for the next two years is "darn near zero," said Gundlach, whose Los Angeles-based DoubleLine was overseeing $81 billion in assets under management as of the end of the third quarter.

"Junk bonds are signaling with clarion bells: Do not raise interest rates," Gundlach said. Excessive issuance of covenant-lite debt is yet another sign of danger in the credit markets, he added. Junk bonds should be sold on strength, he said.

If oil stays below $50, downgrades will come to the investment-grade bond market, he said.

Gundlach said emerging markets may lead developed markets lower against the backdrop of rising borrowing costs in emerging markets. He said Latin American currencies have crashed and Middle East currencies are down. "No wonder" the yield premium demanded by the markets from emerging markets has been rising, he said.

Underneath the surface, with the exception of Switzerland, European interest rates are quietly rising, Gundlach said.

The 2-year US Treasury has been rising for four "long" years and the 5-year bottomed in 2012 as did the 10-year in 2013. "We're already in a rising-rate environment," Gundlach said.

Last year, Gundlach correctly predicted that U.S. Treasury yields would fall, not rise as many others had forecast, because inflationary pressures were non-existent and technical factors, including aging demographics, were at play. Since the Spring, Gundlach has said the U.S. economy and risk markets cannot digest a premature Fed hike.

Gundlach said closed-end funds are trading at attractive yields and deep discounts, but no one is buying them. He called them a good convexity trade with low downside and large upside. Gundlach said investors should buy the India stock market and hold it for 25 years because of great demographics.